On almost all mortgage-related transactions, an appraisal is a required part of underwriting. An appraisal is completed by an unbiased, third-party licensed appraiser hired by the lender. They protect the lender’s interest and confirm the value of the property being purchased or refinanced. During an appraisal inspection, the property is evaluated to determine the condition and value of the home. Pictures and measurements are collected by the appraiser to support the determined value.
Examples of What an Appraiser Looks For:
Age or condition of the home – Newer homes are typically worth more because the major systems are usually in better working order. Generally speaking, the better the condition, the higher the value
Size and square footage – Usable or livable space is a major factor. Price per square foot is a metric that is referenced by the appraiser.
Completed upgrades or improvements – Value is attached to enhancements done on the home.
Needed repairs that impact value – Major repairs that haven’t been made (cracked windows, water damage, etc.) will be taken into consideration.
Amenities or special features – Pools, spas, home theaters, and guest houses are all examples of amenities.
Construction details – Modern materials, current insulation, or energy-efficient windows all impact a home’s value.
Lot size or zoning – Lot size can affect home value, as well as zoning restrictions or building opportunities
Comparables – Appraisers will look at recent sales of similar nearby homes to help determine value.
Location – School district ratings, nearby amenities, curb appeal of surrounding homes, as well as proximity to major metro areas and public transportation all, play a role in the valuation
What happens when the appraisal is lower than the purchase price?
When a home is appraised for less than its purchase price, this can affect the buyer’s mortgage and possibly the contract surrounding it, too. Fortunately, this does not leave a buyer without options. Low appraisals can happen in any marketplace- hot, cold, or neutral. While they are not too common, they do happen, and there are a few of the options a borrower has when faced with a low appraisal value:
1. Renegotiate the Purchase Price
A buyer typically does not want to pay more than what a home is worth, so it makes sense to request that the seller drop the price to the appraised value. This approach may be more realistic if the home has sat on the market for several months. Sometimes the seller will meet in the middle, meaning they might agree to accept $5,000 in cash and lower the price by $5,000, if the difference is $10,000.
The longer a home sits on the market, the tougher it is to sell at the highest possible price. For newly listed homes, however, the seller may not be as flexible. This brings us to the next option:
2. Make Up the Difference in Cash or Pay Mortgage Insurance
Let’s assume that the purchase price of a home is $250,000, and the original down payment was $50,000 which is 20% of the price. If the appraisal comes back at $240,000, and the seller isn’t budging on the price of the home, you can choose to make up the difference by:
a) Increasing the down payment to $60,000 and covering the difference of the appraised value
b) Keeping the down payment at $50,000, covering the difference in the appraised value ($10,000), and the remaining $40,000 would equal a down payment of 17% of the purchase price
Private mortgage insurance (PMI) is an option if your down payment does not match 20% of the purchase price. While an extra monthly payment is not ideal, it makes sense for buyers that cannot afford to come up with an additional $10,000 on the spot.
3. Dispute the Appraisal or Order a Second Appraisal Inspection
Appraisers make mistakes, and while this is extremely rare, it could definitely be an explanation for a low appraisal. Sometimes the appraiser will use inaccurate comparables, fail to take upscale amenities into account, or maybe bidding wars drive home sales higher than appraisals can support.
If there is proof that the first appraisal was problematic or inaccurate, the buyer can request a new one. However, only the buyer can make a request for another appraisal, and this may or may not be honored by the lender. The buyer will often be responsible for the cost of the second appraisal and timelines laid out by their Residential Purchase Agreement may make this a less than ideal option.
If you’re ready to buy, refinance, or have any questions, please feel free to contact us at
(760) 930-0569 so we may assist you. You can also visit our website.